VIENNA (Reuters) - Since Hassan Rouhani became president, Iran has stopped expanding its uranium enrichment capacity, a U.N. inspection report showed on Thursday, in a potential boost for diplomacy to end Tehran's nuclear dispute with the West.

The quarterly report by the International Atomic Energy Agency (IAEA) also said that since August no further major components had been added to a potential plutonium-producing reactor that worries the United States and its allies.

The marked slowdown in the growth of activities of possible use in developing nuclear bombs may be intended to back up Rouhani's warmer tone towards the West after years of worsening confrontation, and strengthen Tehran's hand in talks with world powers due to resume on November 20.

The six powers - the United States, France, Germany, Britain, Russia and China - are pressing Iran to curb its nuclear programme to ease fears that it may be seeking to develop nuclear weapons, a charge Tehran denies.

Iran halted a previously rapid increase in its capacity to refine uranium - which can fuel nuclear power plants but also bombs if processed much more - "when their team changed" in August, a senior diplomat familiar with the IAEA report said, referring to Rouhani and his administration.

But Iran is still pressing ahead with its most sensitive nuclear activity, the enrichment of uranium to a fissile concentration of 20 percent, a relatively short technical step away from weapons-grade material, the report showed,

Israeli Prime Minister Benjamin Netanyahu - who strongly opposes any deal with Iran that does not dismantle its entire enrichment programme - said he was "not impressed" as the Islamic state did not need to expand its programme.

"They've got enough facilities, enough centrifuges to develop and to complete the fissile material which is at the core of an atomic bomb," Netanyahu said.

Israel, believed to be the Middle East's sole nuclear-armed power, has long warned it could use force to prevent Iran from gaining such weapons.

The Arak reactor, which Iran previously said it would start up in the first quarter of 2014 but later postponed, is of great concern for Western powers as it could yield weapons-grade plutonium once it is operating.

France said during talks between Iran and world powers in Geneva last week that Tehran must suspend building Arak.

However, the IAEA report showed that Iran has "more or less frozen" construction of the heavy water reactor, the diplomat said, making clear he did not believe it would be up and running any time soon: "Major components are missing from the plant."

The quarterly IAEA document was the first that included developments only since Rouhani took office on August 3, prompting a diplomatic opening during which Iran and the world powers have made progress towards a possible nuclear accord.

STILL BELOW ISRAELI "RED LINE"

It was issued the same week as Iran agreed to grant IAEA inspectors access to two nuclear-related facilities as part of a cooperation pact to resolve outstanding issues between the two, including suspicions of nuclear bomb research by Tehran.

"Iran has now taken two unilateral steps to show it wants a deal - it has stopped expanding its nuclear programme and begun to provide more transparency," said Middle East expert Cliff Kupchan of risk consultancy Eurasia group. This was "clever diplomacy - it puts the onus on the West to respond."

The report also showed that Iran's stockpile of 20 percent enriched uranium had risen by about 5 percent to 196 kg (431 pounds) since August, largely due to a temporary halt in converting the material into reactor fuel.

But it still remained below the roughly 250 kg (550 pounds) needed for a bomb if processed further - an amount that Israel has indicated is a "red line" that may trigger military action.

Iran says it needs higher-grade enriched uranium to fuel a medical research reactor in the capital, Tehran.

It says it is refining uranium for peaceful energy. But its refusal so far to scale back its nuclear programme and open it up to unfettered IAEA inspections has drawn tough sanctions that have severely damaged its oil-dependent economy.

The IAEA said Iran had installed only four first-generation IR-1 centrifuges - machines used to refine uranium - at its Natanz plant since August, making a total of 15,240. In the previous three-month period, May-August, it put in place an additional 1,800. Not all of the centrifuges are operating.

The report also said Iran had not installed any more advanced centrifuges, which can refine uranium much faster than the IR-1 model and have also fanned concern in the West.

Negotiations between Iran and the six major powers are scheduled to resume in Geneva next week. They want Iran to halt its most sensitive nuclear work and take other measures to restrict its programme in exchange for limited sanctions relief as part of a confidence-building deal that would buy time for talks on a more far-reaching settlement.

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